GAO

United States General Accounting Office

A

Testimony

Before the Subcommittee on Transportation, Treasury, and 

Independent Agencies, Committee on Appropriations, 

House of Representatives

For Release on Delivery 

Expected at 2 p.m. EDT 

Wednesday, May 7, 2003

COMPLIANCE AND 

COLLECTION 

Challenges for IRS in 

Reversing Trends and 

Implementing New 

Initiatives 

Statement of Michael Brostek, Director

Strategic Issues

GAO-03-732T
From fiscal years 1993 through 2002, IRS’s four major compliance programs for 

individual taxpayers had mixed trends in the portion of taxpayers they contacted 

with two declining, one increasing, and one staying relatively the same. Among 

the programs, IRS’s often-cited audit rate declined about 38 percent. From fiscal 

years 1996 through 2001, IRS’s collection program experienced almost universal 

declines in workload coverage, cases closed, direct staff time used, productivity, 

and dollars of unpaid taxes collected. Many parties have expressed concern 

about the compliance—especially audit—and collections trends for their 

potential to undermine taxpayers’ motivation to fulfill their tax obligations. 

Since 2001 IRS has sought more resources including increased staffing for 

compliance and collections. Despite receiving requested budget increases, 

staffing levels in key occupations were lower in 2002 than in 2000. These 

declines occurred for reasons such as unbudgeted expenses consuming budget 

increases and other operational workload increases. Based on past experience 

and uncertainty regarding some expected internal savings, fiscal year 2004 

anticipated staff increases might not fully materialize. 

IRS’s 2004 budget proposes a substantial initiative to address known sources of 

EIC noncompliance. IRS intends to ramp up the initiative rapidly with planning 

and implementation proceeding simultaneously. If it is to succeed, the initiative 

will require careful planning and close management attention. 

IRS also proposes to use private collection agencies to assist in collecting 

certain delinquent tax debt. IRS is seeking authority to retain some tax receipts 

in a revolving fund to pay the private collectors. A pilot effort to use private 

collectors in 1996 was unsuccessful, in part because IRS was unable to identify 

and channel appropriate collection cases to the private collectors. Key 

implementation details for this proposal must be worked out and it too will 

require careful planning and close management attention. 

Proposed EIC Initiative Caseloads by Fiscal Year and Initiative Type, 2004-08 

Thousands of filers 

 Fiscal year 

Initiative 2004 2005 2006 2007 2008 

Relationship 

certification 45a

 2,000 1,500 800 100 

Qualifying child 

Residency 

certification a 0 1,000 1,000 1,000 

Filing status 5 450 450 450 450 

Income reportingb 175 470 470 470 470 

Source: IRS. 

Note: Projections are based on receiving an initiative-specific annual appropriation of $100 million. 

a

In 2004, a total of 45,000 claimants will be asked to certify both their relationship and their 

residency. 

b

Also known as the “underreporter” initiative. 

Taxpayers’ willingness to 

voluntarily comply with tax laws 

depends in part on their confidence 

that friends, neighbors, and 

business competitors are paying 

their fair share of taxes. The 

Internal Revenue Service’s (IRS) 

programs to ensure compliance 

and to collect delinquent taxes are 

viewed by many as critical for 

maintaining the public’s confidence 

in our tax system. 

The Subcommittee asked GAO to 

present information on trends in 

IRS’s compliance and collection 

programs and to discuss issues 

related to IRS’s efforts to increase 

staffing for these programs. GAO 

was also asked to discuss IRS’s 

plans to launch new initiatives to 

reduce noncompliance with the 

Earned Income Tax Credit (EIC) 

and to use private collection 

agencies to assist in collecting 

delinquent taxes. 

GAO is not making any 

recommendations. GAO is 

currently working with members of 

Congress to define the scope of 

work they would like GAO to do to 

assess IRS’s proposed initiative to 

address EIC noncompliance. 

www.gao.gov/cgi-bin/getrpt?GAO-03-732T.

To view the full report, including the scope 

and methodology, click on the link above. 

For more information, contact Michael 

Brostek at (202) 512-9110 or 

brostekm@gao.gov. 

Highlights of GAO-03-732T, a testimony 

before the Subcommittee on 

Transportation, Treasury, and 

Independent Agencies, Committee on 

Appropriations, House of Representatives 

May 7, 2003 

COMPLIANCE AND COLLECTION

Challenges for IRS in Reversing Trends 

and Implementing New Initiatives 
Page 1 GAO-03-732T 

Mr. Chairman and Members of the Subcommittee:

I am pleased to participate in the Subcommittee’s hearing today focusing 

on compliance issues and initiatives in the Internal Revenue Service’s (IRS) 

fiscal year 2004 budget request. Specifically, my statement today will cover 

recent trends in IRS’s compliance and collection programs, IRS’s staffing 

for these programs, and its initiatives to expand compliance efforts for the 

Earned Income Credit (EIC) and to use private collection agencies to assist 

in the collection of delinquent tax debt. 

From fiscal years 1993 through 2002, IRS’s compliance programs for 

individual taxpayers—audits, document matching, nonfiler identification, 

and math error corrections—had mixed trends in the rate at which they 

contact potentially noncompliant taxpayers with two declining, one 

increasing, and one staying relatively the same.1

 Among the four programs, 

IRS’s often-cited audit rate declined approximately 38 percent comparing 

1993 to 2002. In the collection area, comparing fiscal years 1996 to 2001 

IRS’s collection program experienced almost universal declines in 

workload coverage, cases closed, direct staff time used, productivity, and 

dollars of unpaid taxes collected.2

 Many parties have expressed concern 

about the compliance program--especially audit—and collection program 

trends for their potential to undermine taxpayers’ motivation to fulfill their 

tax obligations. 

Concerned about these trends, IRS has sought additional resources, 

including increased staffing levels for compliance and collection since 

fiscal year 2001. However, despite receiving requested budget increases, 

staffing levels in key occupations were lower in 2002 than in 2000. Reasons 

for this decline include unbudgeted expenses consuming budget increases 

and workload increases in other essential operations. The 2004 budget 

again proposes funding increases in part to augment staffing for 

compliance and collection activities. Also, as it did last year, IRS projects 

that savings from more efficient operations will enable it to shift more 

staffing into these activities in 2004. Current savings projections since the 

budget was prepared, as well as the past history of unrealized staffing 

1

 IRS and others sometimes refer to the four programs as enforcement programs. 

2

 The collection of delinquent taxes is also considered to be a compliance program by IRS. 

For purposes of this testimony, it is discussed separately. 
Page 2 GAO-03-732T 

increases, raise questions about whether IRS will realize the full staffing 

increases it expects.

In the compliance area, IRS’s 2004 budget proposes a new initiative to 

address noncompliance in the EIC. The EIC initiative is a substantial new 

effort to target known sources of EIC noncompliance that IRS intends to 

ramp up rapidly. Planning and implementation for this initiative will 

proceed simultaneously. The success of the initiative will depend on 

careful planning and close management attention as IRS’s implementation 

progresses. 

In the collection area, IRS has proposed using private collection agencies 

to assist it with a portion of the collection activities for some delinquent tax 

debt. IRS is requesting authority to retain some tax collection receipts in a 

revolving fund that would be used to pay the private collectors. A pilot 

effort to use private debt collectors in 1996 was unsuccessful, in part 

because IRS was unable to identify and channel appropriate collection 

cases to the private debt collectors. Various key details for implementing 

this proposal must be worked out and it, like the EIC initiative, will require 

careful planning and close management attention if Congress authorizes 

the effort.

Our assessment of IRS compliance and collection trends, and budget issues 

is based on recently issued GAO products. We updated certain trends for 

IRS’s fiscal year 2002 operations by analyzing IRS management reports. We 

also used data reported by the Treasury Inspector General for Tax 

Administration. To assess the status of IRS’s EIC initiative and plans to use 

the assistance of private collection agencies, we interviewed IRS officials 

and reviewed documents prepared to justify both initiatives. 

I will now discuss these issues in more detail, turning first to trends in IRS’s 

compliance and collection programs.

Trends in Compliance 

and Collection 

Programs Have 

Triggered Concern

In recent years, steep declines have occurred in some of IRS’s compliance 

programs for individual taxpayers, as have broad declines in its efforts to 

collect delinquent taxes. These trends have triggered concerns that 

taxpayers’ motivation to voluntarily comply with their tax obligations could 

be adversely affected. 
Page 3 GAO-03-732T 

Compliance Trends Are 

Mixed; the Often Cited Audit 

Rate Has Declined Steeply

Taxpayers’ willingness to voluntarily comply with the tax laws depends in 

part on their confidence that their friends, neighbors, and business 

competitors are paying their fair share of taxes. IRS’s compliance 

programs, including audits, document matching, and other efforts, are 

viewed by many as critical to maintaining the public’s confidence in our tax 

system. 

Looking across all four of IRS’s major enforcement programs between 

fiscal years 1993 and 2002 reveals a somewhat mixed picture, as shown in 

figure 1. The four programs and their trends are as follows: 

• The math error program that identifies obvious errors such as 

mathematical errors, omitted data, or other inconsistencies on the filed 

tax return. Using only the math error count, which is consistent 

throughout the 10 years, the math error contact rate rose 33 percent 

(from 3.59 to 4.79 percent).

• The document matching program that identifies unreported income 

using information returns filed by third parties such as employers and 

banks. Document matching rates went up and down at various times but 

ended 45 percent lower (from 2.37 percent to 1.30 percent) in 2002 

compared to 1993.

• The nonfiler program that identifies potential nonfilers of tax returns by 

using information return and historical filing data. The nonfiler rates 

also went up and down but ended in 2002 about where they were in 

1993.

• The audit program that checks compliance in reporting income, 

deductions, credits and other issues on tax returns through 

correspondence or in face-to-face meetings with an IRS auditor. 

Comparing 1993 to 2002, the audit contact rate dropped 38 percent 

(from 0.92 to 0.57 percent) even though it rose significantly between 

1993 and 1995.
Page 4 GAO-03-732T 

Figure 1: IRS Compliance Contact Rates, Fiscal Years 1993-2002

Note: The revised math error contact rate includes roughly 2 million contacts that IRS had been 

making but had not been reporting as math errors for fiscal years 1997 through 2002. IRS had not 

collected data on these math errors prior to fiscal year 1997. 

Figure 2 shows compliance program trends based on income ranges. 

Although audit rates for individual taxpayers in higher and middle-income 

ranges rose slightly in 2002, overall they were significantly lower in 2002 

than in 1993, while the rate for the lowest income range was virtually the 

same in 2002 as in 1993. The audit contact rates for the highest and lowest 

income individuals essentially converged at around .8 percent in fiscal 

years 2001 and 2002. Most of the audits of the lowest income individuals 

dealt with EIC claims. Document matching contact for all three income 

ranges rose somewhat between 2001 and 2002. However, rates for all three 

income ranges ended significantly lower in 2002 than 1993 following similar 

patterns of change over the years. Data on contact rates by income level 

were not available for the math error and nonfiler programs.

Rate (percent)

0

1

2

3

4

5

6

7

8

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Year

Math error

Document matching

Audit

Math error (revised)

Nonfiler

Source: GAO analysis of IRS data.
Page 5 GAO-03-732T 

Figure 2: IRS Individual Audit and Document Matching Contact Rates by Income Level, Fiscal Years 1993-2002

Collection Trends Have 

Declined

As we reported in May 2002, between fiscal years 1996 and 2001 trends in 

the collection of delinquent taxes showed almost universal declines in 

collection program performance, in terms of coverage of workload, cases 

closed, direct staff time used, productivity, and dollar of unpaid taxes 

collected.3

 Although IRS’s workload generally declined for two of those 

indicators, workload and cases closed, the collection work it completed 

declined more rapidly creating an increasing gap as show in figure 3.4

 

During that 6-year period, the gap between the new collection workload 

and collection cases closed grew at an average annual rate of about 31 

percent. 

Document matching rates (percentage) 

0

1

2

3

4

5

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Year Year

$100,000 and over

$25,000 to under $100,000

Under $25,000

Source: GAO analysis of IRS data.

Audit rates (percentage) 

0

1

2

3

4

5

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

3

 U.S. General Accounting Office, Tax Administration: Impact of Compliance and 

Collection Program Declines on Taxpayers, GAO-02-674 (Washington, D.C.: May 22, 2002). 

4

 Workload is the number of delinquent accounts assigned to field and telephone collection. 

Work completed is the number of delinquent accounts worked to closure, excluding 

accounts for which collection work has been deferred. 
Page 6 GAO-03-732T 

Figure 3: Percentage Gap between Collection Workload and Work Completed, Fiscal 

Years 1996-2002

The increasing gap between collection workload and collection work 

completed led IRS in March 1999 to start deferring collection action on 

billions of dollars in delinquencies. IRS’s inventory of delinquent accounts 

was growing and aging and the gap between its workload and capacity to 

complete work was increasing. Officials recognized that they could not 

work all collection cases, and they believed that they needed to be able to 

deal with taxpayers more quickly, particularly taxpayers who were still in 

business and owed employment taxes.5

 

By the end of fiscal year 2002, after the deferral policy had been in place for 

about 3 and one-half years, IRS had deferred taking collection action on 

about $15 billion in unpaid taxes, interest, and penalties. IRS’ deferral of 

collection action has declined somewhat since the deferral policy was 

adopted. Although the rate has declined from 45 percent in 2000 to about 

5

 IRS considers employment tax compliance to be among the most challenging issues for 

small business, since delinquent tax can rapidly compound beyond the employer’s ability to 

pay. See U.S. General Accounting Office, Tax Administration: IRS’s Efforts to Improve 

Compliance with Employment Tax Requirements Should Be Evaluated, GAO-02-92

(Washington, D.C.: Jan. 15, 2002).

-5

0

5

10

15

20

25

30

35

40 Percentage of workload

1996 1997 1998 1999 2000 2001 2002

Source: GAO analysis of IRS data.
Page 7 GAO-03-732T 

32 percent in 2002, IRS is still deferring collection action on about one out 

of three collection cases. 

Concerns Regarding the 

Compliance and Collection 

Trends

Many parties have expressed concern about these trends in IRS’s 

compliance and collection programs. Since the mid-1990s, we have issued 

six reports on IRS compliance and collection trends in response to 

congressional concerns.6 During annual oversight hearings on IRS, 

Congress often raises questions about the declining audit rate and possible 

effects on compliance. In recent years, congressional concerns as well as 

IRS’s requests have resulted in efforts to augment IRS’s staffing levels. 

In fact, the former IRS Commissioner’s report to the IRS Oversight Board 

during September 2002 made what was perhaps the most explicit case for 

additional staffing to address IRS’s compliance and collection 

performance. Although the Commissioner recognized that IRS needed to 

improve the productive use of its current resources, he cited a need for an 

annual 2 percent staffing increase on top of planned productivity increases 

over 5 years to help reverse the trends. In terms of the collection of tax 

debts, the IRS Commissioner estimated that an almost 60 percent gap 

exists between IRS’s collection workload and the work it has completed. 

Closing this gap, according to the Commissioner, would require 5,450 new 

full-time staff.7

 IRS also has been looking for ways to free resources for 

compliance programs by boosting productivity or reducing workload in 

other areas. 

6

 U.S. General Accounting Office, Tax Administration: Audit Trends and Results for 

Individual Taxpayers, GAO/GGD-96-91 (Washington, D.C.: Apr. 26, 1996); Tax 

Administration: IRS’ Audit and Criminal Enforcement Rates for Individual Taxpayers 

Across the Country, GAO/GGD-99-19 (Washington, D.C.: Dec. 23, 1998); IRS Audit Rates:

Rate of Individual Taxpayers Has Declined With the Effect on Compliance Unknown, 

GAO-01-484 (Washington, D.C.: Apr. 25, 2001); Tax Administration: Use of Nonaudit 

Contacts, GAO/GGD-00-7 (Washington, D.C.: Mar. 16, 2001); Tax Administration: Impact of 

Compliance and Collection Program Declines on Taxpayers, GAO-02-674 (Washington, 

D.C.: May 22, 2002); and Tax Administration: IRS Should Continue to Expand Reporting 

on Its Enforcement Efforts, GAO-03-378 (Washington, D.C.: Jan. 31, 2003). 

7

 Internal Revenue Service, Report to the IRS Oversight Board: Assessment of the IRS and 

the Tax System, September 2002.
Page 8 GAO-03-732T 

In our recent Performance and Accountability Series report on the 

Treasury Department, we cite the collection of unpaid taxes as one of the 

management challenges facing IRS.8

 In that report, we state that IRS is in 

various stages of planning and implementing management improvements, 

including reengineering compliance and collection practices. However, as 

of September 30, 2002, IRS’s inventory of known unpaid taxes totaled

$249 billion, of which $112 billion has some collection potential, and is at 

risk.9

 

Increasing Compliance 

and Collection Staffing 

Has Been and Remains 

an IRS Priority, but 

Declines Have 

Continued

Since 2001, IRS's budget requests have made increasing its compliance and 

collection staff one of several key priorities. For example, in its 2001 

budget request IRS asked for funding for the Staffing Tax Administration 

for Balance and Equity initiative, which was designed to provide additional 

staff for examination, collection, and other enforcement activities. 

However, as shown in figures 4 and 5, staffing in two key compliance and 

collection occupations were lower in 2002 than in 2000. This continues a 

general trend of declining staffing in these occupations for a number of 

years. 

8

 U.S. General Accounting Office, Major Management Challenges and Program Risks: 

Department of the Treasury, GAO-03-109 (Washington, D.C.: January 2003).

9

 Known unpaid taxes consist of (1) taxes due from taxpayers for which IRS can support the 

existence of a receivable with a taxpayer agreement or a favorable court ruling (federal 

taxes receivable), (2) compliance assessments in which neither the taxpayer nor the court 

has affirmed that the amounts are owed, and (3) write-offs, which are unpaid assessments 

for which IRS does not expect collections due to such factors as the taxpayer's death, 

bankruptcy, or insolvency. The $112 billion only includes the first two categories.
Page 9 GAO-03-732T 

Figure 4: Number of Revenue Agents, Fiscal Years 1996-2002 

Figure 5: Number of Revenue Officers, Fiscal Years 1996-2002

The declines in compliance and collection staffing occurred for several 

reasons, including increased workload and unbudgeted costs. In 

September 2002, the Commissioner attributed the decline in compliance 

Number of revenue agents

11,000

12,000

13,000

14,000

15,000

16,000

1996 1997 1998 1999 2000 2001 2002

Fiscal year ended

Source: Treasury Inspector General for Tax Administration.

Number of revenue officers

3,000

3,500

4,000

4,500

5,000

5,500

6,000

1996 1997 1998 1999 2000 2001 2002

Fiscal year

Source: Treasury Inspector General for Tax Administration.
Page 10 GAO-03-732T 

staffing to increases in workload in other essential operations, such as 

processing returns, issuing refunds, and answering taxpayer mail. In the 

most recently completed fiscal year, 2002, IRS faced unbudgeted cost 

increases, such as rent and pay increases, of about $106 million. As a result, 

IRS had to delay hiring revenue agents and officers. IRS noted in its 2002 

budget request that any major negative changes in the agency's financial 

posture, such as unbudgeted salary increases, will have a negative effect on 

staffing levels.

Fully Realizing a Fiscal Year 

2004 Staffing Increase May 

Be Challenging

For fiscal year 2004, IRS is requesting $10.4 billion, an increase of 5.3 

percent over fiscal year 2003 requested levels, and 100,043 full-time 

equivalents (FTE). Also, IRS's 2004 budget request is its second in a row to 

propose increased spending for higher priority areas that would be funded, 

in part, with internal savings redirected from other areas. Specifically, IRS 

proposes to devote an additional $454 million and 3,033 more FTEs to 

enhance programs, including compliance and some customer service areas. 

As shown in figure 6, $166 million of the enhancements would be funded 

from internal savings with the remainder funded from the budget increase.

Figure 6: IRS's Proposed Funding for Program Enhancements

We commend IRS for identifying savings to be reinvested in operations to 

improve IRS performance. This approach implements a key principle of 

IRS's long-term modernization effort. Under this approach, the 

reengineering of IRS's work processes, much of which depends on 

investments in computer modernization, would automate or eliminate 

$10.4 billion budget request

$454 million

in proposed

program 

enhancements 

$10 billion for current operations

$166 million

from internal

savings 

$288 million

from budget

increase 

Source: GAO analysis IRS data.
Page 11 GAO-03-732T 

work, improve productivity, and free staff time that could then be 

redirected to higher priority customer service and compliance activities.

Some caution is appropriate, however, in considering whether the 

additional FTEs will be realized. In addition to the potential that some cost 

increases may not be funded as in prior years, revised projections 

developed since the 2004 budget request was prepared raise questions 

about IRS's ability to achieve all the savings projected and shift resources 

to compliance as planned. 

IRS has revised the savings associated with several reengineering efforts 

identified in the 2004 budget request. Revisions this far in advance of the 

start of the fiscal year are not a surprise. They do indicate some 

uncertainty associated with the budget request's savings projections.

For example, most significant reengineering efforts planned for fiscal year 

2004, in terms of FTEs and dollars to be saved, will not achieve all of their 

projected savings because the efforts were based on assumptions that will 

not be realized, according to IRS data and officials. IRS's effort to improve 

the efficiency of compliance support activities, the single most significant 

effort, depended partially on IRS implementing individual compliance 

savings projects in 2003. This effort was projected to save 394 FTEs and 

almost $26 million. However, due in part to delays until 2004 to allow for 

additional testing, this effort is now expected to save about 30 percent of 

the original projections through the end of fiscal year 2004. IRS now 

projects that the seven most significant efforts will save 1,073 FTEs and 

$60.5 million, down from original projections of 1,356 FTEs and 

$77.7 million.

Reengineering efforts may not achieve all of their savings goals, in part, 

because of the long time lag between when IRS begins developing its 

budget request and when the fiscal year begins. As with most other federal 

agencies, IRS usually begins formulating its budget request about 18 

months before the start of the fiscal year and about 10 months before the 

President submits his budget to Congress. With planning beginning so far 

ahead of the budget's actual execution, inevitable intervening events, such 

as delays in implementing computer systems, make the assumptions upon 

which projections are based no longer realistic.

In addition to lower current estimates of the potential savings from the 

seven most significant reengineering estimates, some of the other 

reengineering efforts listed in the 2004 budget request are not well defined. 
Page 12 GAO-03-732T 

This raises questions about whether they will achieve their savings goals. 

For example, IRS still is reviewing its procedures to identify ways to make 

tax return processing more efficient. Although IRS projected this effort to 

save 203 FTEs and $6.9 million, it has not yet identified the operational 

areas that will be reengineered. IRS officials said that the projected savings 

are based on a 2 percent efficiency increase, but they are currently 

determining how to achieve that goal.

According to IRS budget officials, IRS uses its budget formulation process 

to establish productivity goals, although the responsible business units may 

not know specifically how savings will be achieved. Officials said that this 

approach encourages innovation in meeting performance goals while 

identifying ways to save FTEs and budget dollars.

EIC Initiative Is a 

Substantial and 

Challenging Strategy to 

Target Known 

Compliance Problems

IRS’s 2004 budget submission requests $100 million and 650 FTEs for a new 

initiative to improve compliance in one area in which noncompliance is 

known to be a concern: EIC. Although Treasury and IRS have made 

progress in defining the scope and nature of the initiative, many details 

about its implementation are still to be settled as planning for and 

implementation of the initiative proceed simultaneously. IRS hopes that 

this effort will reduce EIC noncompliance without unnecessarily burdening 

or discouraging those who are eligible for and claim EIC. Given its scope, 

potential effects on EIC claimants, and planned rapid expansion, the 

success of the initiative will depend on careful planning and close 

management attention as IRS implements the initiative. 

Begun in 1975, the EIC is a refundable tax credit available to certain lowincome, working taxpayers. Two stated long-term objectives of Congress 

have been: 1) to offset the impact of Social Security taxes on low-income 

individuals; and 2) to encourage these same individuals to seek 

employment, rather than depend on welfare benefits. Researchers have 

reported that the EIC has been a generally successful incentive-based 

antipoverty program, as was intended by Congress.10 For tax year 2001, 

about $31 billion was paid to about 19 million EIC claimants. 

10 The Council of Economic Advisers, Good News for Low Income Families: Expansions in 

the Earned Income Tax Credit and the Minimum Wage, December, 1998. Congressional 

Research Service, The Earned Income Tax Credit (EITC): An Overview, Updated report, 

March 19, 2003.
Page 13 GAO-03-732T 

However, in addition to its successes, the EIC program has historically 

experienced high rates of noncompliance—including both overclaims and 

underclaims of benefits. For over a decade we have reported on IRS’s 

efforts to reduce EIC noncompliance. Due to persistently high 

noncompliance rates, we have identified the EIC program as a high-risk 

area for IRS since 1995.11 An IRS study of 1985 tax returns estimated that 

the EIC overclaim in that year rate was 39.1 percent. The results of 

subsequent EIC compliance studies conducted by IRS are shown in table 1.

Table 1: EIC Overclaim Rates for Selected Years

Source: IRS reports.

Notes: All overclaim rates were adjusted by IRS to reflect dollars recovered from ineligible recipients. 

For 1994 only a single estimate was available. In 1997 and 1999, because not all individuals 

responded to the audit contacts, IRS used certain assumptions to estimate an overclaim rate range. 

The lower bound assumes that the overclaim rate for the nonrespondents is the same as for the 

respondents, while the upper bound assumes that all non-respondents are overclaims. 

In 1997, Congress instructed IRS to improve EIC compliance through 

expanded customer service and outreach, strengthened compliance, and 

enhanced research efforts. For these efforts Congress authorized a 5-year, 

EIC-specific appropriation of $716 million. Although the 5-year period 

elapsed in fiscal year 2002, Congress appropriated $145 million specifically 

for EIC compliance for fiscal year 2003. For fiscal year 2004, IRS is 

requesting $153 million for this appropriation; the $100 million request for 

the new EIC initiative is separate. 

Early in 2002, when the results of IRS’s most recent study of EIC 

compliance for tax year 1999 were released, the Assistant Secretary of the 

Treasury and the IRS Commissioner established a joint task force to seek 

new approaches to reduce EIC noncompliance. The task force sought to 

11 Prior to 2001, EIC was part of a broader IRS Tax Filing Fraud high-risk area. Beginning in 

2001, the focus of that designation was narrowed to EIC specifically. See U.S. General 

Accounting Office, High-Risk Series: An Update, GAO-01-263 (Washington, D.C.: January 

2001). 

Overclaim rate estimates

Tax year Lower-bound Upper-bound 

1994 -- 23.5

1997 23.8 25.6

1999 27.0 31.7
Page 14 GAO-03-732T 

develop an approach to validate EIC claimants’ eligibility before refunds 

are made, while minimizing claimants’ burden and any impact on EIC’s 

relatively high participation rate. Through this initiative, administration of 

the EIC program would become more like that of a social service program 

such as Food Stamps or Social Security Disability, where proof of eligibility 

is required prior to receipt of any benefit.

Based on its various studies of EIC noncompliance, IRS determined that 

three specific areas account for a substantial portion of EIC 

noncompliance. These three areas—qualifying child eligibility, improper 

filing status, and income misreporting (also called “underreporter”)—

account for nearly 70 percent of all EIC refund errors, according to IRS. 

The joint Treasury/IRS task force designed an initiative that would address 

each of these sources of EIC noncompliance. 

Filers that improperly claim qualified children represent the single largest 

area of EIC overclaims, on a dollar basis. Under the proposed initiative, 

IRS will attempt to verify all taxpayers’ claims for EIC-qualifying children 

under two criteria: a residency and a relationship certification. IRS plans to 

use third-party databases and other means to verify qualifying children for 

an estimated 80 percent of EIC claimants. All other EIC claimants will be 

asked to provide additional eligibility documentation prior to the filing 

season. Those who do not respond and/or are unable to document their 

eligibility will have the EIC portion of their returns frozen. If taxpayers do 

not provide documentation before the filing season, IRS plans to require 

them to provide it during or after the filing season. When and if they 

document their eligibility, the EIC portion of their returns will be released. 
Page 15 GAO-03-732T 

Initially, beginning in the summer of 2003, IRS intends to select 45,000 EIC 

claimants whose qualifying child residency or relationship requirements 

could not be verified from available databases. IRS plans under its 

initiative to contact these taxpayers and give them the opportunity to 

provide verifying documentation for the child (or children) that is (are) 

claimed to qualify for the EIC. The two components of establishing 

qualifying child eligibility—the claimant’s relationship to the child, and 

residency with the claimant for more than 6 months—will be treated 

somewhat differently. Taxpayers who establish their qualifying child 

relationship will not have to do so in future years but all taxpayers will 

have to show annually that the children lived with them for the required 

time. IRS expects to expand the program in July 2004 by starting to contact 

approximately 2 million taxpayers; in another planned expansion in July 

2005, IRS would contact 2.5 million taxpayers.12 

The other two parts of this initiative will cover an additional 180,000 highrisk filers for tax year 2003—5,000 to verify their filing status and 175,000 to 

verify their income. Criteria for selecting the 5,000 cases in the filing status 

category have not yet been determined. They will be drawn from tax year 

2003 cases. For the 175,000-case income verification initiative, IRS will use 

document matching to identify EIC filers who have a history of 

misreporting income in order to increase (or receive) the EIC.13 Based on 

that history, these taxpayers’ returns are to be flagged when their 2003 EIC 

claims are filed. Any EIC refund portion of each return is then to be frozen 

until IRS can verify the taxpayers’ income through document matching or 

audit procedures in the fall of 2003. These filers will be identified out of tax 

year 2002 and 2003 cases. Table 2 shows IRS’s projections for future 

casework in all three initiative areas.

12 According to IRS, planned expansions are estimates that depend on its assessments of its 

capacity to handle and the results the proposed 45,000 filer initiative.

13 IRS’s automated underreporter system will be an important part of the income verification 

initiative. 
Page 16 GAO-03-732T 

Table 2: Proposed EIC Initiative Caseloads by Fiscal Year and Initiative Type, 

2004-08

Source: IRS documents.

Note: Projections are based on receiving an initiative-specific annual appropriation of $100 million and 

estimates of how many cases IRS can adequately work.

a

In 2004, a total of 45,000 claimants will be asked to certify both their relationship and their residency.

b

Also known as the “underreporter” initiative. 

Although the Treasury/IRS task force and now IRS have made progress in 

defining the scope and nature of this initiative, many details about its 

implementation are still to be settled. IRS expects to learn lessons from 

initial sample cases it will work in 2003 that will be incorporated into 

planned expansions of the effort later in 2003 and in 2004. IRS officials said 

that estimates of the number of new employees that will be needed and 

their training requirements are evolving. For example, although IRS’s 2004 

budget submission identifies 650 FTEs for this initiative, current plans are 

for a much lower staffing level at this point. In addition, cost and FTE 

estimates are based on historical data that may not be directly comparable 

to the staffing and technological demands of the initiative. Based on these 

estimates, of the $100 million 2004 request, IRS has proposed budgeting 

just under $55 million for direct casework in the three compliance areas. 

The remaining $45 million is allocated to technology improvements and 

management, development, and implementation costs related to the three 

targeted compliance areas.

Fundamental to the precertification of qualifying children is the 

development of clear forms that identify the specific types of 

documentation IRS will accept to substantiate that a qualifying child meets 

the relationship and residency tests for EIC. IRS is currently working with 

others, like the Taxpayer Advocate, to develop these new forms, which are 

to be used beginning this summer. 

Thousands of filers

Fiscal Year

Initiative 2004 2005 2006 2007 2008

Qualifying child Relationship 

certification 45a 2,000 1,500 800 100

Residency 

certification a 0 1,000 1,000 1,000

Filing status 5 450 450 450 450

Income reportingb 175 470 470 470 470
Page 17 GAO-03-732T 

Recently, concerns have been expressed about IRS’s intention to request 

marriage certificates as proof of relationship to the qualifying child. We 

have not looked at this specific issue. However, our 2002 report noted that 

EIC forms and instructions that IRS used for similar attempts to determine 

qualifying child eligibility could be confusing to taxpayers and required 

documents that EIC claimants had difficulty obtaining. 14 When taxpayers 

have been disallowed the EIC through an IRS audit, they are required to 

substantiate their qualification for the EIC—that is, “recertify”—before 

they can receive the credit again. As part of this process, IRS’s forms 

indicated that EIC claimants could, for example, use medical records to 

prove a child’s residency with them. However, EIC claimants faced 

difficulty in providing such records. Low-income working families are less 

likely to have stable relationships with medical service providers and their 

children are less likely to have routine medical care. 

IRS officials said that they plan to pretest the proposed precertification 

forms both to determine whether they are clear and understandable to EIC 

claimants but also to determine whether the claimants can provide the 

required information. This is a critical step in implementing the initiative. 

We recently reported that IRS seldom tests the new and revised individual 

tax forms and instructions. 15

Ensuring consistent interpretation of documentation gathered in the new 

initiative will also be important. In our 2002 report, we noted that IRS 

examiners did not consistently assess documentation for qualifying 

children. For example, we asked 21 examiners to examine five EIC 

scenarios. The 21 examiners did not agree for any of the scenarios, and, in 

some cases, the examiners reached widely varying judgments about 

whether the evidence was sufficient to support an EIC claim.16 In order to 

better ensure consistent and accurate decisions based on documentation 

submitted, we recommended that IRS provide training to its examiners.

14 U.S. General Accounting Office, Earned Income Credit: Opportunities to Make 

Recertification Less Confusing and More Consistent, GAO-02-449 (Washington, D.C.: 

Apr. 25, 2002). 

15 U.S. General Accounting Office, Tax Administration: IRS Should Reassess the Level of 

Resources for Testing Forms and Instructions, GAO-03-486 (Washington, D.C.: Apr. 11, 

2003). 

16 GAO-02-449. 
Page 18 GAO-03-732T 

Administering the EIC is not an easy task for IRS. IRS has to balance its 

efforts to help ensure that all qualified persons claim the credit with its 

efforts to protect the integrity of tax system and guard against fraud and 

other forms of noncompliance associated with EIC. This initiative is a 

substantial undertaking with a relatively aggressive implementation 

schedule. Although it appears to be targeted to address known compliance 

issues, its success will depend on careful planning and close management 

attention. Any one of many challenges could put the initiative at risk. 

These include whether, for instance, the proposed new forms will result in 

evidence that IRS can use to verify relationship and residency 

requirements. Further, IRS must determine whether lessons from the first 

attempts to verify the eligibility of relatively small numbers of EIC 

claimants can be learned and incorporated before the substantial 

expansion of the initiative in fiscal years 2004 and 2005.

Challenges Must Be 

Met if IRS Is to 

Successfully Use 

Private Collection 

Agencies 

IRS’s 2004 budget requests $2 million and legislative authorization for use 

of private collection agencies (PCA)17 to assist IRS in collecting certain 

types of delinquent tax debt. IRS proposes to fund continuing use of PCAs 

from a to-be-established revolving fund that would receive a portion of 

taxes collected through use of PCAs.

As with its EIC initiative, IRS has defined the parameters for its use of 

PCAs, but many key details for implementing the initiative remain to be 

resolved. These implementation details, such as identifying delinquent 

debt cases suitable for PCAs to pursue and protecting taxpayer rights, will 

be critical if the initiative is to succeed. If the PCA initiative is authorized, 

IRS will need to put focused management attention on planning and 

monitoring the implementation of the PCA initiative to ensure proper 

handling of these issues.

As previously noted, IRS’s inventory of delinquent debt is growing and 

aging, with the gap between its workload and capacity to complete work 

increasing. As a consequence, IRS has been deferring about one in three 

new delinquency cases without pursuing any collection action. This 

practice is contrary to the experience of Treasury and IRS, which indicates 

that referring eligible debts for collection as early as possible greatly 

enhances the success of collection efforts. The former IRS Commissioner 

17 IRS is calling this initiative “Collection Contract Support.”
Page 19 GAO-03-732T 

estimated in 2002 that it would take 5,450 FTEs and $296.4 million for IRS 

to bridge the gap between its workload and capacity to complete the 

collection casework. 

To help bridge this gap, Treasury has proposed an initiative to reach 

taxpayers to obtain payment on delinquent debt through the assistance of 

PCAs. Under this initiative, IRS would give PCAs specific, limited 

information on outstanding tax liabilities, such as types of tax, amount of 

the outstanding liabilities, tax years affected, and prior payments. Based 

on the information provided by the IRS, PCAs would then be permitted to 

locate and contact taxpayers, requesting payment of liabilities (i.e., tax, 

interest, or penalty) in full or in installments (within 3 years, as specified by 

IRS). If a taxpayer’s last known address is incorrect, the PCAs would 

search public records for the correct address. PCAs are not to be 

permitted to contact third parties to locate taxpayers. PCAs would not be 

allowed to accept payments; all payments must be made to IRS. PCAs 

would generally have 12 to 24 months to attempt collection. Afterwards, 

uncollected accounts are to be redistributed to other PCAs for additional 

collection efforts. Because PCAs would have no enforcement power, the 

initiative would allow the IRS to focus its own enforcement resources on 

more complex cases and issues. 

Other procedural conditions under the proposal include requiring PCAs to 

inform taxpayers of the availability of assistance from the Taxpayer 

Advocate. Furthermore, PCAs would not be permitted to take any 

enforcement action against a taxpayer, such as seizing assets to satisfy the 

debt. To ensure that taxpayer rights and privacy would be safeguarded, 

PCAs would be governed by the same rules by which IRS is governed. 

Initially, IRS plans to stagger implementation of the initiative. For the first 

6 months, IRS will place collection cases with no more than five PCAs, with 

a total volume estimate not to exceed 50,000 cases per month for the first 3 

months. IRS will contract with additional PCAs at a 6-month interval with 

an anticipated rate of 2.6 million total cases annually by the time all 

agencies have been operational for 1 full year. Assigned case inventory 

rates will depend on a number of factors, including PCA performance, 

ability to manage new inventory, quality control, volume of cases referred 

to IRS for review, and readiness of IRS to supply cases. Based on this 

implementation framework, Treasury has projected revenue estimates of 

$46 million in 2004, and $476 million from 2004 through 2008. 
Page 20 GAO-03-732T 

In order to implement the PCA initiative, IRS must ensure that it will have 

the capacity to fulfill its responsibilities under the proposed contracts and 

to oversee the PCAs. Further, it must make some difficult design decisions. 

One significant capacity issue concerns whether IRS will be able to identify 

those delinquent debts with the highest probability of resolution through 

PCA contacts. Earlier pilot efforts to study use of PCAs in 1996 and 1997 

were hindered, in part, because IRS was unable to do this. For example, 

we reported that the numbers and types of collection cases sent to PCAs 

during those pilots were significantly different from those anticipated in 

the pilot program’s original design. This resulted in substantially fewer 

collection cases than PCAs could productively work to make the effort 

cost-effective. IRS realizes that identifying appropriate cases for referral to 

PCAs is a key issue. While IRS proposes using “case selection analytics” to 

identify appropriate cases, the analytical model has not been developed. 

Another IRS capacity issue relates to the cases that PCAs, for several 

reasons, will refer back to IRS. For instance, under the proposed 

arrangement, if a taxpayer was unable to fully pay the delinquent debt, the 

case would be referred back to IRS. Some cases would then go to a 

different PCA; therefore, the success of that PCA’s efforts in these cases 

would depend on how well IRS reprocesses the cases. Until some 

experience is gained under the proposed program, it will be difficult to 

reliably estimate the number of cases that will be referred back to IRS and 

the number of resources it will need to devote to the cases. 

Other IRS capacity issues concern, for instance, how many resources it will 

take to administer the contracts and to oversee the PCAs’ performance. 

IRS expects to have up to 12 contractors, 2 of which would be small 

businesses, and proposed procedures call for on-site visits and some direct 

observation of PCAs’ collection efforts. IRS would also need to ensure 

PCAs’ performance, such as having adequate procedures to safeguard 

taxpayer information before and after the contracts are awarded, and that 

it and the PCAs have secure computer systems to manage the work flow.

How the PCAs will be compensated is a key design decision that must be 

finalized. On the one hand, IRS needs to provide the PCAs an incentive to 

be efficient in collecting the delinquent debts and on the other hand, it must 

ensure that the incentive does not lead to inappropriate performance 

pressure on PCA staff. IRS intends to make part of PCAs' compensation 

dependent on other factors, such as quality of service, taxpayer 

satisfaction, and case resolution, in addition to collection results. Both the 

law and IRS policy prohibit IRS managers from using records of tax 
Page 21 GAO-03-732T 

enforcement results, such as dollars collected and taxes assessed, to 

evaluate employee performance or set production goals. IRS and Treasury 

report that existing taxpayer protections would be fully preserved under 

the PCA initiative. Specifically, as with IRS employees, PCA employees 

could not be evaluated based on tax enforcement results. IRS is 

considering using a “balanced scorecard” to measure contractors’ 

performance, but has not proposed specifically how this compensation 

balance will be struck.

Finally, although the revolving fund mechanism presents potential 

advantages to IRS in better ensuring that it can pursue delinquent tax 

debts, IRS has not done a cost analysis on implementing the PCA initiative 

versus expanding the use of traditional IRS collection activities. We have 

not seen any plans to do so in the future. Some IRS officials believe that 

because IRS telephone collection staff have a broader scope of authority 

(e.g., the ability to levy a bank account to satisfy the debt) and greater 

experience with collecting delinquent taxes, IRS telephone staff are likely 

to be more effective and cost-efficient than PCAs. PCAs, however, may 

have advantages that IRS lacks. A number of factors would need to be 

considered in doing a cost analysis, and a comparison may not be possible 

without having some experience in using PCAs to collect this type of debt. 

Concluding 

Observations

Although IRS has received increases in its budgets since fiscal year 2001 in 

part to increase staffing to enhance in its compliance and collection 

programs, IRS has been unable to achieve the desired staffing levels. Based 

on past experience and uncertainty regarding some expected internal 

savings that would enable IRS to reallocate staff to these programs, fiscal 

year 2004 staff increases might not fully materialize. Today’s hearing 

provides a useful venue for the Subcommittee to explore these funding 

issues and how IRS should prioritize its efforts.

IRS has defined the scope and nature of its proposed new initiatives to 

address known sources of EIC noncompliance and to use private collection 

agencies to assist in collecting certain delinquent taxes. However, in both 

cases IRS faces significant challenges in moving forward to successfully 

implement the proposals. In commenting on a GAO report on IRS’s 

National Research Program—IRS’s ongoing effort to measure the level of 

taxpayers’ compliance while minimizing the burden on taxpayers selected 

for the study—the former Commissioner said that IRS would not 

compromise the quality of the program in order to meet the program’s 

target date. We believe this is a sound standard for these efforts as well. 
Page 22 GAO-03-732T 

Careful planning for and testing of key implementation steps can help 

ensure the initiatives’ success.

This completes my prepared statement. I would be pleased to respond to 

any questions. 

Contact and 

Acknowledgments

For further information on this testimony, please contact Michael Brostek 

at (202) 512-9110 or brostekm@gao.gov. Individuals making key 

contributions to this testimony include Leon Green, Demian Moore, Neil 

Pinney, and Tom Short. 

(450200)
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